U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

91–162 PDF 2015

OVERSIGHT OF THE FINANCIAL 

STABILITY OVERSIGHT COUNCIL 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 17, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–98 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

STEVEN HORSFORD, Nevada 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

PATRICK T. MCHENRY, North Carolina, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

SPENCER BACHUS, Alabama 

PETER T. KING, New York 

MICHELE BACHMANN, Minnesota 

SEAN P. DUFFY, Wisconsin 

STEPHEN LEE FINCHER, Tennessee 

RANDY HULTGREN, Illinois 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

AL GREEN, Texas, Ranking Member 

EMANUEL CLEAVER, Missouri 

KEITH ELLISON, Minnesota 

CAROLYN B. MALONEY, New York 

JOHN K. DELANEY, Maryland 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

DANIEL T. KILDEE, Michigan 

STEVEN HORSFORD, Nevada 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

September 17, 2014 .......................................................................................... 1 

Appendix: 

September 17, 2014 .......................................................................................... 37 

WITNESSES 

WEDNESDAY, SEPTEMBER 17, 2014 

Clowers, A. Nicole, Director, Financial Markets and Community Investment 

Team, U.S. Government Accountability Office .................................................. 8 

Pinschmidt, Patrick, Deputy Assistant Secretary, Financial Stability Oversight Council, U.S. Department of the Treasury ............................................... 7 

APPENDIX 

Prepared statements: 

Clowers, A. Nicole ............................................................................................. 38 

Pinschmidt, Patrick .......................................................................................... 57 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Maloney, Hon. Carolyn B.: 

Letter to FSOC Chairman Jacob Lew, dated July 29, 2014 ......................... 62 

Pinschmidt, Patrick: 

Written responses to questions for the record submitted by Representative Barr ........................................................................................................ 65 

(1) 

OVERSIGHT OF THE FINANCIAL 

STABILITY OVERSIGHT COUNCIL 

Wednesday, September 17, 2014 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:33 a.m., in room 

2128, Rayburn House Office Building, Hon. Patrick McHenry 

[chairman of the subcommittee] presiding. 

Members present: Representatives McHenry, Fitzpatrick, Bachus, Duffy, Fincher, Hultgren, Barr, Rothfus; Green, Maloney, 

Delaney, Beatty, Heck, Kildee, and Horsford. 

Ex officio present: Representative Hensarling. 

Also present: Representatives Garrett, Neugebauer, and Royce. 

Chairman MCHENRY. The Subcommittee on Oversight and Investigations will come to order. The title of today’s subcommittee hearing is, ‘‘Oversight of the Financial Stability Oversight Council.’’ 

Without objection, the Chair is authorized to declare a recess of 

the subcommittee at any time. 

The Chair will now recognize himself for 5 minutes for an opening statement. 

Today, we will follow up on a hearing that this subcommittee 

held in March of last year where we discussed the Financial Stability Oversight Council’s (FSOC’s) failure to address recommendations from a 2012 U.S. Government Accountability Office (GAO) 

audit. Unfortunately, nearly 2 years after its September 2012 report, the GAO still concludes that the FSOC has not made satisfactory progress towards implementing many of its recommendations. 

The FSOC may well be the least transparent Federal entity in 

the government. Of the 42 meetings held, no substantive description of discussions or members’ perspectives have been provided in 

the meeting minutes. In fact, two-thirds of the meetings were held 

in executive session, completely closed off to the public. 

For comparison’s sake, even the Federal Reserve releases fairly 

detailed transcripts of meetings of the Federal Open Market Committee (FOMC), as well as background material relied on by meeting participants and lengthy minutes that describe in detail the 

issues considered and the participants’ perspectives on those matters. 

What this means for the companies that are potentially subject 

to the SIFI designation by the FSOC is that they must submit vast 

quantities of information demonstrating systemic risk and have no 

2 

idea whether this information is reviewed, and if so, by whom. Furthermore, it is unclear what role, if any, the Office of Financial Research (OFR) plays in the data review process and how the information is ultimately made available to the FSOC’s voting members. 

Even Congress, which created the FSOC and its unprecedented 

authority under the Dodd-Frank Act, has been denied access to 

their process. The dearth of information in the FSOC’s minutes 

makes it impossible for Congress to conduct effective oversight of 

the FSOC and to determine whether the agency has appropriately 

implemented the Dodd-Frank Act. 

For example, detailed minutes from the FSOC’s designation of 

nonbank financial companies for ‘‘heightened prudential supervision,’’ would help Congress assess the effectiveness of the FSOC’s 

application of the statutory criteria for designation. Detailed minutes would also help Congress assess other matters including: the 

nature and quality of members’ discussions concerning systemic 

risk; the relationship between the FSOC and the several staff committees that assist it, including the extent to which the FSOC conducted independent analysis or simply served as a rubber stamp; 

and how the FSOC incorporated data and analysis provided by the 

OFR as part of its deliberations. 

The FSOC has now been in existence for 3 years, yet it is still 

not clear how the FSOC has performed annual reevaluations of its 

SIFI designations, as required by the law. Although the FSOC’s 

July 31st meeting minutes of this year do indicate that reevaluations took place for 2 firms designated over a year ago, it is unclear 

what standards were used to conduct these annual reviews, and it 

is unclear whether a review has been planned or conducted for the 

third company. 

In fact, during a recent hearing this past July, a mere 2 weeks 

before the FSOC voted on the reevaluations, Chair Yellen of the 

Federal Reserve testified that she was unaware whether redesignation decisions were on the agenda for the FSOC consideration. This 

is problematic. 

Therefore, it is not shocking that the GAO concluded that almost 

2 years after its 2012 report, the FSOC has not made satisfactory 

progress in terms of complying with many of its recommendations, 

including those intended to ensure that the FSOC has a comprehensive set of systemic risk indicators, whether or not it is coordinating and clarifying rules with the OFR and other regulators, 

and whether or not it has the ability to adequately assess the effect 

of SIFI designations on the market and on the designated companies. 

I look forward to the hearing today and the testimony from our 

panel of witnesses. And I hope they will address these mounting 

questions that have developed about the FSOC process and its considerably opaque yet very powerful actions over the last 3 years. 

With that, I will recognize the ranking member of the subcommittee, Mr. Green of Texas, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. And thank you for holding this important hearing to discuss the Financial Stability Oversight Council, FSOC. 

3 

The FSOC represents an important piece of the Dodd-Frank solution to the challenges we faced following the 2008 financial crises. 

As a result of the crises, 489 banks failed between 2008 and 2013, 

while only 21 banks failed from 2002 to 2007. An estimated 3.2 

million foreclosures were completed from 2009 to 2011, versus 

about only 1.4 million foreclosures from 2006 to 2008. An estimated $3.4 trillion in real estate wealth was lost since 

2008; 26.2 percent in pension value has been lost since 2008. An 

estimated $7.4 trillion in stock market wealth was lost between 

July 2008 and March 2009. 

And on September 29, 2008, when the House initially voted down 

TARP, the Dow dropped 778 points. An estimated 8.8 million jobs 

were lost between 2007 and 2009. 

In 2008, the unemployment rate was 5.8 percent, versus 9.6 percent in 2010. The suicide rate quadrupled between 2008 and 2010. 

There were about 850,000 bankruptcies in 2007, versus 1.4 million 

bankruptcies in 2009. 

Mr. Chairman, while we may disagree as to whether we should 

amend or end Dodd-Frank, there should be little disagreement regarding the lack of data and oversight of certain sectors of the financial markets, which led to overexposure and overleveraging of 

many large financial institutions. Some important lessons were 

learned that we should share with you. 

One of the lessons learned was that we need greater coordination 

and better data to fully understand the ways in which our financial 

markets were changing. 

Through Dodd-Frank, we created the FSOC, chaired by the Secretary of the Treasury. The FSOC is comprised of 10 voting members, our Federal regulators, and one independent member with insurance expertise, together with five non-voting members, including the Director of the Office of Federal Research, the Director of 

the Federal Insurance Office, a State insurance commissioner, a 

State banking supervisor, and a State securities commissioner. 

Congress empowered the FSOC to oversee the landscape of the financial markets and to designate certain financial institutions as 

systemically important financial institutions, or SIFIs. Through 

this designation, these firms could be subjected to heightened 

standards under the Federal Reserve to ensure the safety of our financial system. 

Nonbank financial institutions of any size can be designated by 

the FSOC through a two-thirds vote, and to date only three firms 

have been so designated. Nonetheless, despite only being a few 

years removed from the worst financial crisis since the Great Depression, the FSOC and its SIFI designation process is under scrutiny. 

Because clarity from the FSOC is important, I do not oppose 

companies asking for additional guidance or feedback regarding the 

FSOC process. Their contention that certain sectors of the financial 

markets are fundamentally structured differently than bank holding companies should be considered when determining an SIFI designation. 

However, we must remember that Dodd-Frank has been a massive undertaking for our Federal regulators. They continue to work 

tirelessly to implement the law, and adjustments will be needed. 

4 

To be clear, I have always contended that I support efforts to improve Dodd-Frank, which is why I believe we should entertain 

questions regarding transparency in the FSOC’s decision-making 

process. However, I do not support efforts that would ultimately 

undermine the FSOC’s ability to monitor systemic risk in our financial system. 

I thank the witnesses for appearing today. I look forward to their 

insights. 

And I yield back the balance of my time. 

Chairman MCHENRY. We will now recognize the chairman of our 

Capital Markets Subcommittee, the gentleman from New Jersey, 

Mr. Garrett, for 5 minutes for an opening statement. 

Mr. GARRETT. Thank you, Chairman McHenry—or is it Chief 

Deputy Whip Chairman McHenry—for holding this important 

hearing. I am not sure I will use all that time. I very much appreciate this hearing on oversight of FSOC, the Financial Stability 

Oversight Council. 

Conducting a thorough and robust overview of this Council is one 

of the most important things that this committee can be doing 

right now. Why is that? Because FSOC has repeatedly defied bipartisan calls to do what? To cease and desist its nonbank designations. We have asked them to improve the transparency of their operations, and also simply to use more data-driven and thorough 

analysis, and frankly, to be accountable to Congress. 

Rarely in all my years have I seen a regulatory body that is so 

defiant of the demands of bipartisan Congress. 

More recently, as media outlets have reported, FSOC has designated a new insurance company as a systemically important financial institution (SIFI). Designating more private companies as 

too-big-to-fail and turning their regulation over to the Federal Reserve and its ever-growing safety net, if you will, is not going to 

solve the problems of taxpayer exposure to the financial system. 

Now, I am sure everyone here has heard the old saying, ‘‘When you 

are in a hole, stop digging.’’ 

Well, sir, I would ask you to do this: When you leave here, please 

tell Secretary Lew to put the shovel down. 

This is just not my analysis. Here is a quote from an independent financial analyst over at Guggenheim Securities, Jaret 

Seiberg. In a note he sent out to his clients, in referring to your 

most recent designation, he said, ‘‘We believe customers now will 

prefer to do business with an insurer that the government has said 

is too-big-to-fail.’’ 

So by your designation, you are driving business that way. 

In conclusion, the FSOC must stop taking us down this road. It 

must stop expanding the taxpayer-backed safety net. It must stop 

distorting competitive forces in various financial markets. And 

hopefully, in several months, we will have in this body and in the 

Senate a critical legislative mass to be able to reform this agency 

and to stop spreading too-big-to-fail. 

With that, I yield back. 

Chairman MCHENRY. We will now recognize the gentlelady from 

New York, Mrs. Maloney, for 3 minutes. 

Mrs. MALONEY. Thank you. And I thank the chairman and the 

ranking member for holding this hearing. 

5 

The Financial Stability Oversight Council, or FSOC, has a threepart mission: identifying risk to financial stability; promoting market discipline; and finally, responding to emerging threats to financial stability. 

Dodd-Frank gave the FSOC one primary tool to mitigate systemic risk: the power to designate financial institutions as systemically important financial institutions, or SIFIs. This is an important and necessary power, and without it we would have no protection against another AIG. 

But because designating companies as SIFIs is so consequential 

to the companies that are designated, it is imperative that the designation process be as transparent, clear, and robust as possible. In 

setting up the designation process, the FSOC went through a 

lengthy public rulemaking that included three separate public comment periods. They should be commended for actively engaging 

with stakeholders and the general public in creating the designation process, but this doesn’t mean that the FSOC designation 

process is perfect and that no improvements can be made. 

In fact, now that we have been through the designation process 

a few times, and three companies have been designated as SIFIs 

and one has been proposed for designation, I believe that the FSOC 

should review what has worked and what can be improved. And 

that is why in July, I sent a letter to Secretary Lew recommending 

four specific changes that I believe would make the designation 

process more fair, thorough, and transparent, without undermining 

the FSOC’s ability to identify and mitigate systemic risk. 

I ask unanimous consent to place this letter in the record. 

Chairman MCHENRY. Without objection, it is so ordered. 

Mrs. MALONEY. The four recommendations that I made are that 

first, the Council should provide notice to companies that they are 

in stage two and let them know what is happening, particularly if 

they are requesting this information. 

Second, the Council should begin its engagement with a company 

that is under consideration. Once it has advanced to stage two, 

start working with them, instead of waiting until stage three. 

Third, when the Council provides a company with notice that it 

has advanced to stage three, the Council should, to the extent feasible, identify what are the particular issues that they feel merit 

further review. 

And fourth, the Council should adopt a policy of automatically 

granting an oral hearing to the company upon request. These companies need to know, for their own planning and their own internal 

efforts what exactly is going on. 

I think these are common-sense proposals that I hope will be accepted by Treasury and FSOC. But also, it is important that we not 

lose sight of the problems that made FSOC necessary: the fact that 

no regulator prior to the crisis had responsibility for monitoring 

risk across the entire financial system, which allowed the huge 

risks to build up outside of the traditional banking sector. 

So I look forward to hearing the witnesses, and I thank you very 

much. 

Chairman MCHENRY. We will now recognize the gentleman from 

Maryland, Mr. Delaney, for 2 minutes. 

Mr. DELANEY. Thank you, Mr. Chairman. 

6 

My colleague, Mr. Garrett, made a good observation when he 

read from the research report, and I think he said that the analyst 

said that business would be going towards companies that were 

designated as systemically important. But it seems to me one of 

two things will happen to a certain percentage of a company’s business if it is designated systemically important: either business will 

go towards it; or business will go away from it. 

Either way, this designation will affect how the market works 

and will affect these private enterprises, which is why I believe it 

is extraordinarily important that the process for designation and 

the communication and the transparency be done to the highest 

standard possible. Because in fact, every one of these enterprises 

that is being considered for designation is already a regulated institution, oftentimes to an extraordinarily high degree. 

So I am looking forward to hearing in your testimony how you 

plan on addressing some of the concerns that my colleague from 

New York has raised, and which I have also addressed with a piece 

of legislation that I have co-authored with my colleague, Mr. Ross, 

in terms of making sure that companies who are considered as a 

potential SIFI have an opportunity—they and their regulators—to 

discuss in great detail what the strategy is for designation and 

what other alternatives are available for these companies to avoid 

a designation, if possible. 

For example, if a business had an activity that the FSOC considered problematic, are we giving companies an opportunity to divest 

that activity so that the activity in concern could actually be removed from the institution? That seems to me to be, as an example, a better way to accomplish the objectives of FSOC. 

So I care a lot about transparency; I care a lot about process; and 

I care about making sure these companies have a seat at the table, 

as do their regulators, to have a robust dialogue and to come up 

with alternatives for SIFI designation. Because SIFI designation 

will, in fact, affect how these companies participate in their market, how businesses who do business with them, and counterparties 

who do business with them, think about them, either positively or 

negatively. 

Chairman MCHENRY. The gentleman yields back. 

The Chair will now recognize our witnesses for today’s panel. 

Our first witness is Mr. Patrick Pinschmidt. He is Deputy Assistant Secretary of the Financial Stability Oversight Council. Mr. 

Pinschmidt was previously a Policy Advisor to the Congressional 

Oversight Panel created to review the current state of financial 

markets and the regulatory system. 

He also served as vice president of U.S. equity research for both 

Morgan Stanley and Merrill Lynch. He has a bachelor’s degree 

from Georgetown University and received an MBA from Columbia 

Business School. 

Our second witness is Ms. Nicole Clowers. She is Director of the 

Financial Markets and Community Investment Team at the United 

States Government Accountability Office. Ms. Clowers has been 

with the GAO for over 15 years. She has a bachelor’s degree from 

Virginia Tech and a master’s in public administration from the 

University of Georgia. 

Thank you both for being here. 

7 

The witnesses will be recognized for 5 minutes. 

I know this is not your first rodeo, and so you are aware of the 

lighting system. You are also aware that this committee has an 

atrocious sound system, so if you bring the microphone uncomfortably close to your face and then speak clearly, we might be able 

to hear you. 

And without objection, the witnesses’ written statements will be 

made a part of the record. 

Mr. Pinschmidt, you are now recognized for 5 minutes. 

STATEMENT OF PATRICK PINSCHMIDT, DEPUTY ASSISTANT 

SECRETARY, FINANCIAL STABILITY OVERSIGHT COUNCIL, 

U.S. DEPARTMENT OF THE TREASURY 

Mr. PINSCHMIDT. Thank you. 

Chairman McHenry, Ranking Member Green, and members of 

the subcommittee, thank you very much for the opportunity to testify today regarding the Financial Stability Oversight Council. 

Next month will mark the fourth anniversary of the Council’s 

first meeting. Federal and State financial regulators now meet regularly to coordinate and work together to identify and respond to 

potential threats to financial stability. The Council has convened 

over 40 times, and just over the last year has considered issues including market volatility, the debt ceiling impasse, interest rate 

risk, developments in Europe and emerging economies, housing finance reform, operational incidents in the U.S. equity markets, and 

cybersecurity. 

The broad range of these issues illustrates the importance of an 

organization charged with looking across the financial system to 

identify, monitor, and respond to risks to financial stability. 

Congress gave the Council a number of authorities to address 

risks to financial stability. The Council has shown a willingness to 

use these authorities and a commitment to rigorous analysis. 

It has designated three nonbank financial companies for Federal 

Reserve supervision and enhanced prudential standards. It has 

designated eight financial market utilities for enhanced risk management standards. It has issued for public comment proposed recommendations regarding money market mutual fund reform. And 

it has made specific recommendations in its annual reports regarding reforms to address vulnerabilities in the tri-party repo markets 

and other areas. 

In its first 4 years, the Council has also worked extensively with 

the GAO and other oversight bodies, and we respect their role in 

making recommendations to help the Council fulfill its statutory 

responsibilities. 

I want to now highlight some of the ways in which the Council 

has built an organization framework that supports openness and 

collaboration throughout its work. Beginning with its very first 

meeting in October 2010, the Council voluntarily adopted a transparency policy. The Council expanded that policy earlier this year 

to improve the flow of information to the public. 

With respect to the nonbank designations process, the Council 

has established a rigorous and fair process for evaluating nonbank 

financial companies for potential designation. Although a rulemaking was not required in this context, the Council developed a 

8 

rule and guidance regarding this authority and provided the public 

with three separate opportunities to comment on this approach. 

The Council’s careful analysis of individual nonbanks include extensive interactions with the companies under consideration. Together, for the three nonbank financial companies that have been 

designated, the firms submitted thousands of pages of information 

to the Council, met with the Council or staff dozens of times, and 

each company received a detailed written explanation of the Council’s analysis before a vote on the final designation was taken. 

It is important to note that much of the Council’s work, particularly with regard to companies under consideration for potential 

designation, relies on sensitive, company-specific information that 

would not be shared by firms or regulators without an expectation 

of confidentiality. The Council has a statutory responsibility to protect the confidentiality of this information, as its disclosure could 

result in destabilizing market speculation. 

Within this context, the Council is continually examining how it 

can monitor emerging threats to the financial system while also 

opening up more of its work to the public. In this regard, the Council’s annual report is an important example of the Council’s commitment to sharing information about its work with Congress and 

the public in a clear and transparent manner. 

Since its first meeting, the Council has received a number of suggestions regarding its practices, including some from members of 

this committee. Although it is a relatively young organization, the 

Council has already demonstrated its commitment to improving the 

effectiveness of its work and its engagement with the public. 

Consistent with that history, I expect that the Council will consider potential changes to its nonbank designations process in the 

coming months and will continue to evolve. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Pinschmidt can be found on page 

57 of the appendix] 

Chairman MCHENRY. We now recognize Ms. Clowers for 5 minutes. 

STATEMENT OF A. NICOLE CLOWERS, DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT TEAM, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Ms. CLOWERS. Chairman McHenry, Ranking Member Green, and 

members of the subcommittee, thank you for having me here today 

to discuss our work on FSOC. As you know, FSOC was created to 

address a regulatory weakness highlighted by the recent financial 

crisis—namely, a lack of an agency responsible for looking across 

the system to identify and respond to threats to the financial system. 

In September 2012, we issued our first audit report of FSOC and 

made nine recommendations. Since that time, FSOC has taken 

steps to address some of the recommendations. However, as we reported in 2012, and our findings and recommendations made clear, 

additional work is needed. 

Our 2012 recommendations were intended to improve FSOC’s 

risk-monitoring functions, accountability, transparency, and colVerDate Nov 24 2008 18:05 Jan 30, 2015 Jkt 091162 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\91162.TXT TERRI
9 

laboration. Since 2012, as I said, FSOC has taken some steps to address our recommendations. 

For example, it has worked to improve communication with the 

public by redesigning its Web site and making more timely notices 

of upcoming meetings. FSOC has also developed bylaws for its deputies committee, which is an important collaboration improvement. 

However, more work is needed to fully address our recommendations. With the rest of my time, I would like to highlight some key 

recommendations where we think additional work is needed. 

First, we recommended in 2012 that FSOC develop a systematic 

and comprehensive approach to identify systemic risk in emerging 

threats. We noted that FSOC’s approach might not help identify 

new risk that member agencies had not already identified. 

Two years later, FSOC continues to rely on largely the same 

process. While OFR has made some progress in developing data 

tools to support FSOC since the 2012 report, we observe that these 

tools suggest that one tool is still under development and the other 

is not risk-focused. 

Second, related to accountability and transparency, we recommended that FSOC keep detailed records of their closed-door 

meetings. While no specific level of detail is required for FSOC’s 

minutes, the limited documentation of their discussion makes it 

difficult to assess FSOC’s performance. 

FSOC officials said they have attempted to improve meeting minutes that are provided to the public, but FSOC officials said they 

do not plan to keep more detailed minutes or have them transcribed because of the confidential information discussed. We continue to believe the lack of detailed minutes limits both transparency and accountability. 

Also related to accountability, we recommended that FSOC comprehensively evaluate whether the designations of financial companies for enhanced supervision are having the intended impacts. 

Congress intended that the designations would lead to greater financial stability. These designations will likely have other significant benefits and costs, both for the designated firms as well as the 

Nation’s economy. 

Given these potential impacts, it is important that retrospective 

reviews of the designations are undertaken. FSOC has not yet 

begun preparations for or committed to conducting such reviews. 

We have previously reported on the importance of advanced planning for these reviews. 

Finally, to improve collaboration and coordination, we recommended that FSOC clarify its roles and responsibilities among 

FSOC and its member agencies for systemic risk monitoring, and 

adopt practices to coordinate rulemaking across member agencies. 

FSOC officials told us they do not plan to implement these recommendations because the overlapping responsibilities for monitoring systemic risk has not been problematic. 

They also said FSOC lacks the authority to direct independent 

agencies. We maintain that action within FSOC’s existing authority is needed, as our past work has shown that the lack of clear 

roles and coordination can lead to duplication, confusion, and regulatory gaps. 

10 

In conclusion, Mr. Chairman, FSOC has taken some steps to address our recommendations, but more work is needed. We believe 

that fully addressing our recommendations will improve FSOC’s 

systemic risk monitoring functions, allow Congress to hold them accountable for results, and enhance collaboration among FSOC’s 

members. 

Chairman McHenry, Ranking Member Green, and members of 

the subcommittee, this concludes my prepared statement. I would 

be happy to answer any questions at the appropriate time. Thank 

you. 

[The prepared statement of Ms. Clowers can be found on page 38 

of the appendix.] 

Chairman MCHENRY. Thank you, Ms. Clowers. 

And thank you both for your testimony. 

I will now recognize myself for 5 minutes for questions. 

Can you please describe, Mr. Pinschmidt, to what extent the 

FSOC and OFR have developed comprehensive mechanisms for 

identifying and monitoring systemic risk? 

Mr. PINSCHMIDT. Yes. Thank you. 

The FSOC operates a very robust committee system to— 

Chairman MCHENRY. I am asking very specifically here. We only 

have 5 minutes, so if you can just get into the specifics here. 

Mr. PINSCHMIDT. Yes. I guess what I would say is it is important 

to have some context in terms of the committee’s structure and— 

Chairman MCHENRY. I am aware of the committee’s structure. I 

am asking, the GAO report is a pretty damning one when it comes 

to this question of whether or not you have a comprehensive systemic risk monitoring system, and they say you do not. So what is 

your response to that? 

Mr. PINSCHMIDT. I believe Ms. Clowers is referring to the OFR 

Markets Monitor, which is a publication by the OFR that provides 

a systematic overview of the marketplace and key trends and developments, and it has been something that is shared on a regular 

basis at the FSOC Systemic Risk Committee on— 

Chairman MCHENRY. Is that sufficient? 

Mr. PINSCHMIDT. No. It is not really meant to be sufficient. It is 

one input— 

Chairman MCHENRY. What are the other ingredients for sufficiency so you can measure systemic risk? 

Mr. PINSCHMIDT. The other ingredients would be the other working groups, the other areas of the different regulatory communities 

that are focused on key areas of— 

Chairman MCHENRY. So, as a matter of oversight, to make sure 

that is, in fact, the case, how can I know that, when the GAO in 

their audit says that you do not have that systemic risk assessment? 

Mr. PINSCHMIDT. The systemic risk assessment that Ms. Clowers 

was referring to is viewed within the FSOC context as a complement to its ongoing work throughout the committee systems and 

the ad hoc groups that are focusing on specific risks. 

Chairman MCHENRY. Okay. 

Ms. Clowers, to this question, why does the GAO believe that the 

FSOC and OFR have failed to develop comprehensive and systemic 

mechanisms for identifying and monitoring systemic risk? 

11 

Ms. CLOWERS. They lack such processes. They use the Systemic 

Risk Committee to help identify risk, but what happens in that 

committee is each member brings ideas and those ideas bubble up. 

What we are looking for is a comprehensive, systematic approach 

or a common set of indicators that would look across the system 

to identify potential threats, that these indicators would be forward-looking, risk-focused, and less dependent on who shows up to 

a meeting, rather that it be routine, everyone would know which 

data they are looking at. 

Chairman MCHENRY. Okay. 

So, Mr. Pinschmidt, I want to bring something up, and I know 

you are fairly well-versed in it. When you worked at Morgan Stanley, you wrote a piece in June of 2008 about Lehman Brothers. I 

know you have answered this question before, but the piece is entitled, ‘‘Bruised, Not Broken, and Poised for Profitability,’’ talking 

about Lehman Brothers. And going in just 2 months before Lehman’s bankruptcy and failure, you are touting that they are on the 

road for profitability. 

I bring this up not to embarrass you. You have obviously written 

a lot. You have had a very long career. But this highlights how difficult it is to really assess systemic risk, does it not? 

Mr. PINSCHMIDT. Yes. Certainly, I made the wrong call on that, 

and a lot of other people did too. But what I would say is, sort of 

more importantly, the market misjudged the impact of Lehman’s 

failure in terms of counterparties, other institutions. And it just 

kind of reminds us today—and I think to Ms. Clowers’ point—that 

we need to make sure that there are appropriate safeguards in 

place. 

We need to make sure that there is increased transparency. To 

the extent that firms are large and outsized, we need to make sure 

that there are enhanced prudential standards and there are steps 

taken in terms of resolution authority to— 

Chairman MCHENRY. So to that question— 

Mr. PINSCHMIDT. —the risks from a firm’s failure. 

Chairman MCHENRY. So to that question of transparency, that is 

what we are here today talking about. 

I want to move on. The FSOC recently announced that it is taking ‘‘a more focused analysis of industry-wide products and activities to assess potential risks associated with the asset management 

industry.’’ So does this mean that the FSOC is no longer going to 

designate asset management companies as SIFIs? 

Mr. PINSCHMIDT. Congressman, what that means is—and I think 

you are referring to the readout from the July 31st Council meeting. At that meeting, the Council directed FSOC staff and member 

agency staff to undertake an analysis of asset management activities and their products. 

That decision was—is driven by a recognition that asset managers are different from other companies— 

Chairman MCHENRY. Sure. But this was interpreted, so is 

BlackRock still at stage two in this process? 

Mr. PINSCHMIDT. Companies, unless they are voted on, remain in 

a stage. 

Chairman MCHENRY. So that is called purgatory, right? It is neither heaven nor hell. It may not be so bad. It may not be for any 

12 

sort of length of time that you can determine. And you just leave 

people in a suspended state of animation. Is that a fair assessment? 

Mr. PINSCHMIDT. The Council operates a three-stage process. 

Stage one is based on public metrics that each company can assess. 

The key threshold is $50 billion in assets, and then if you trip one 

of five other metrics you are in stage two. Unless the composition 

of the company’s metrics changes, that company remains in stage 

two. 

Chairman MCHENRY. Forevermore? 

Mr. PINSCHMIDT. Unless there is a vote. 

Chairman MCHENRY. Okay. And could there be a vote to put 

them back in stage one? 

Mr. PINSCHMIDT. That would only be appropriate—a vote isn’t 

needed to put them into stage one. They would automatically go 

back to stage one if the metrics changed and therefore they didn’t 

hit the thresholds to advance to stage two. 

What I would like to sort of stress on this is that stage one is 

purely mechanical. There doesn’t have to be any analysis by the 

Council; it is based on publicly available data. If you trip those 

metrics, you are in stage two, and therefore subject to more evaluation by the Council. 

Chairman MCHENRY. I have gone well over my time. 

We will now go to Mrs. Maloney of New York for 5 minutes. 

Mrs. MALONEY. Thank you. 

I think that there may be a disconnect between the Council’s 

duty to identify and mitigate systemic risks and the tools that they 

have to work on it. For example, if the Council identifies a particular company that is systemically risky, it has by statute the 

tools to mitigate that risk by an SIFI designation, which puts them 

under stronger regulation with the Fed. 

But if the Council identifies an industry-wide activity which was 

really part of the prior financial crisis with the credit default swaps 

and other activities that are systemically risky, the most it can do 

to mitigate that risk, according to the statute, is to issue a nonbinding recommendation to other regulators. 

So my question is, is it fair to ask the Council to identify activities based on systemic risk but then not give the Council the authority to do anything about any of these activities except for a recommendation? I would like a comment on that. 

It seems to me that sometimes it is the activities that are the 

most risky in a financial situation, not necessarily the institutions, 

which may be reacting to a financial crisis that was created by the 

risky activities. To me, I think the risky activities should have 

more attention, really. 

So my question is that, and I ask Mr. Pinschmidt. 

Mr. PINSCHMIDT. Thank you, Congresswoman. What I would note 

is that the Council has very strong convening powers bringing regulators together across the financial system, and that in and of 

itself is very important when looking at activities, because activities don’t necessarily impact individual institutions and individual 

marketplaces; they stretch across the financial system. 

So in that convening power there are a number of steps that the 

Council could take based on the nature of the risk, to the extent 

13 

risk is identified. One of the steps is just asking for more information: working with the primary regulators; working with the industry; asking for more information and getting more detail and more 

data. A lot of times when risks are identified it is because there 

is not enough information there, so that is a very logical outgrowth 

of that process. 

Other times, to the extent a risk is identified and there is more 

work that a regulator can do, there are two options for the Council. 

It can highlight a risk in the annual report or it can issue a Section 

120 recommendation to a specific regulator regarding potentially 

taking some action. 

So again, and I think in the broader context, though, it starts a 

process, it focuses regulators, and there are a number of authorities 

that can come out of that process. 

Mrs. MALONEY. Do you think that the Council should have the 

authority to issue binding regulations to address serious activities 

that are based on risk? 

Mr. PINSCHMIDT. It is really not for me to answer that question, 

but I would defer to the Council on that. 

Mrs. MALONEY. Okay. 

Ms. Clowers, can you comment on whether the FSOC has the 

tools it needs to carry out its statutory duties? 

Ms. CLOWERS. It has the tools necessary and the people necessary in the room to make decisions and carry out its duties. 

Where we have recommended that we think additional work is 

needed is work on the development of their systemic risk monitoring functions. 

There has been some discussion today of the different data tools 

that are available, including those provided by the OFR. We think 

those tools could be enhanced by making them more risk-focused 

and forward-looking. And also, even the OFR Advisory Committee 

has encouraged OFR to be more aggressive in the development of 

their tools. 

Mrs. MALONEY. I would like to ask Mr. Pinschmidt, when the 

Council is analyzing whether a company is systemically important, 

they don’t measure whether the failure of the company would destabilize the system in normal times; they measure whether it 

would destabilize the system in a period of stress in the financial 

industry. Can you comment on how that standard has affected the 

Council’s analysis of whether companies are systemically important 

and what are the benefits or the drawbacks of that system? 

Mr. PINSCHMIDT. That guidance was built into the final rule on 

guidance for the nonbanks designations process, and essentially the 

rationale behind that was a recognition that rarely do firms fail in 

a vacuum; there is generally a precipitating event, there is broader 

market weakness, economic weakness. And so thus, it is appropriate to look at firms in the context of not perfect markets, not 

terrible markets, but not great markets either. 

Mrs. MALONEY. What are the drawbacks of that system? 

Mr. PINSCHMIDT. I’m sorry, I— 

Mrs. MALONEY. What are the drawbacks of that system, of just 

designating it in a time of extreme stress—and the benefits? Do 

you think that is the right approach? Should we do it just for financial stress times or also normal times? 

14 

Mr. PINSCHMIDT. I think it is a recognition that when a firm is 

undergoing stress, there are generally precipitating events and the 

market is not functioning generally— 

Mrs. MALONEY. So you support that approach. Thank you. 

Mr. FITZPATRICK [presiding]. The gentlelady’s time has expired. 

I am going to recognize myself for 5 minutes. 

Good morning, and I appreciate your participation in the hearing. 

In his opening statement, Chairman McHenry, I guess referring 

to the GAO report, identified FSOC as perhaps the least transparent agency in all of the Federal Government. And likewise, Mr. 

Delaney, in his comments, addressed concerns that because of the 

significant influence that FSOC has in the designation process, 

how critical it is that the thought process, the reasoning, that it all 

be laid out and that it be transparent. 

So my question for you, Mr. Pinschmidt: Is it your position that 

FSOC cannot be made more transparent than it is today? 

Mr. PINSCHMIDT. What I would note is the FSOC really values 

transparency, and— 

Mr. FITZPATRICK. Could it be made more transparent? 

Mr. PINSCHMIDT. Yes. I think that has been a continuous arc 

since the first meeting 4 years ago. 

Mr. FITZPATRICK. Specifically, what actions are you prepared to 

take, including further clarification, more detailed meetings, minutes, and— 

Mr. PINSCHMIDT. Yes. I think there have been a number of suggestions, including from this committee, and we have received suggestions from outside stakeholders. And as I noted in my oral remarks, we expect, in terms of at least the nonbanks designations 

process, the Council will begin to evaluate potential changes there. 

And what I would note is, look, we are not—the Council 

shouldn’t be frozen in its ways. To the extent that there is good 

feedback and suggestions out there that make sense, the Council 

is open to considering those, and I expect that, again, for—in the 

example of transparency, it is a balance for the Council— 

Mr. FITZPATRICK. Sure. Do— 

Mr. PINSCHMIDT. —because the Council—sorry. 

Mr. FITZPATRICK. Through August of 2014, you have had 42 

meetings. Have any of those meetings been transcribed? Have any 

of those transcriptions, if you have them, been released? 

Mr. PINSCHMIDT. The practice of the Council has been to release 

public minutes following the next meeting, once they are approved. 

Mr. FITZPATRICK. Where substantive matters are considered? 

Mr. PINSCHMIDT. The minutes serve as the record for the meeting. 

Mr. FITZPATRICK. And how about executive sessions? Are there 

executive sessions of the Council? 

Mr. PINSCHMIDT. Certainly from time to time there—like around 

Hurricane Sandy there were meetings that were held on short notice to bring regulators together to respond to what was going on. 

Mr. FITZPATRICK. Mr. Pinschmidt, on a slightly different matter, 

in testimony before the Senate Banking Committee on September 

8th, Governor Tarullo expressed his, what he called, ‘‘pretty strong 

15 

presumption’’ that traditional or core insurance activities do not 

pose systemic risk. 

Former House Financial Services Committee Chairman Barney 

Frank expressed the same view earlier this summer before this, his 

old committee. 

Do you agree with Governor Tarullo and Chairman Frank that 

traditional or core insurance activities do not pose systemic risk? 

Mr. PINSCHMIDT. I haven’t had the opportunity to speak with 

Governor Tarullo or former Chairman Frank on that. What I would 

note, in terms of the insurance analysis that has been done by the 

Council, that has been done at a company-specific level, looking at 

the designations authority. And the nature of those determinations 

for the two insurance companies that were identified was based on 

the size, interconnectedness, and leverage, and other factors of 

those institutions, not necessarily a reflection on core insurance 

products or practices that were particularly highlighted. 

Mr. FITZPATRICK. So the question is, do core insurance activities—do they or do they not pose systemic risk? 

Mr. PINSCHMIDT. The nature of the evaluation that was done by 

the Council on the specific insurance firms related to those firms’ 

general size, structure, interconnectedness with the financial system, and the impact of their potential failure on market functioning. 

Mr. FITZPATRICK. So your answer is yes? 

Mr. PINSCHMIDT. What I am trying to say is the nature of the 

analysis undertaken by the Council on those companies was based 

on company-specific factors and what effect the failure of those 

companies would have on the broader financial system. 

Mr. FITZPATRICK. Governor Tarullo also noted that AIG and Prudential were designated as systemic not because of their core insurance activities but due to what he called ‘‘nontraditional insurance 

activities,’’ where runnability is more of a concern, and also with 

respect to things that are not insurance activities of any sort. Do 

you agree with Governor Tarullo that to justify designating an insurance company as an SIFI that one would have to find that the 

company engages in activities that are not traditional insurance activities and that do pose systemic risk? 

Mr. PINSCHMIDT. I haven’t had an opportunity to talk to Governor Tarullo regarding his testimony, but the analysis that was 

done for the insurance companies was company-specific rather than 

industry as a whole, and it was based on the size, leverage, and 

interconnections of those companies and how that makeup could 

transmit to the rest of the financial system. 

Mr. FITZPATRICK. I now recognize Mr. Delaney for 5 minutes. 

Mr. DELANEY. Thank you, Mr. Chairman. 

MetLife is a 146-year-old company that has generally been a 

pretty well-regarded company, and it is likely that they are going 

to sue the United States over this designation, in part because they 

feel like the process was bad. Do you consider that a failure of the 

process? 

Mr. PINSCHMIDT. I cannot comment on any specific companies 

that have not been designated. What I can say is the Council runs 

a very thorough and robust process. 

16 

I did note one example in my testimony. For one of the companies that was ultimately designated, the Council and its member 

agency staff met with or had phone calls with the company 20 

times over a period of a year. There were 200 data submissions totaling 6,000— 

Mr. DELANEY. Did the members of the Council meet with the 

senior management team of the company as a group? 

Mr. PINSCHMIDT. Prior to a vote on the final designation, the 

company was offered a hearing before the Council and the company 

presented to the Council, yes. 

Mr. DELANEY. How much before the designation was that presentation made? 

Mr. PINSCHMIDT. That was 60 days before a vote on a final designation. And it is worth noting that prior to that hearing, the company was given a very detailed basis for the proposed designation, 

roughly 200 pages long outlining the key views of the Council. 

So it wasn’t the company coming in there blind, not knowing 

where the Council was. They kind of had all the facts in front of 

them; they could argue different points and present their case. 

Mr. DELANEY. When you talk about the factors that went into 

this designation, aside from activity-based analysis, which I think 

your comment to the Chair was that you considered other factors, 

and you talk about size and leverage—when you think about leverage, do you adjust for the nature of the liabilities? Because insurance companies have very long-dated liabilities. 

Mr. PINSCHMIDT. Certainly. This is not a mechanical approach by 

any stretch. It is very specific; it is very analytical. There is a lot 

of back-and-forth with the company. 

There are significant questions from the Council side. There are 

significant questions from the company side. So to sort of force certain metrics based on where they sit and make a determination 

would not be the right approach. 

Mr. DELANEY. When you looked at the designation of MetLife, for 

example, did you factor into your analysis that MetLife, if it were 

to be designated, or other insurance companies that would be designated, would, in fact, as a result of designation, get out of certain 

businesses that they are currently in that have counterparty risks 

associated with them and that those businesses would likely run or 

go from a large, heavily regulated 150-year-old company into new 

startup insurance companies that were being organized in fact to 

take advantage of the fact that certain business activities would 

have to leave MetLife? 

Did you factor into your overall systemic risk analysis for the 

good of the financial system that designation actually forces activities out of large, well-regulated companies into institutions that 

have lighter regulation, are not as well-capitalized, and don’t have 

as long of a track record? 

Mr. PINSCHMIDT. The Council, as part of its ongoing risk monitoring, is, of course, always looking at what are the developments 

in the financial system, what is the impact on financial market 

functioning— 

Mr. DELANEY. But my question is specifically as it relates to a 

company, did anyone sit there and say, ‘‘Well, if we designate this 

company, the following businesses will likely leave the company 

17 

and they will go into new startup, largely unregulated or lightly 

regulated institutions with limited track records,’’ and did that— 

did risk associated with that transfer of activities from large, safe, 

big, long-term to new startup, unproven, lightly regulated—did 

that—the risk associated with that transfer, which I view there 

being risk, was that factored into the risk cost, if you will, of designation? 

Mr. PINSCHMIDT. In terms of the company-specific designation 

authority, the statute is clear on that front that the Council must 

consider—must identify risks in terms of kind of the remedy and 

what happens next, in terms of enhanced prudential standards— 

Mr. DELANEY. But my question is, did someone sit at the table 

and say, ‘‘If we designate this company, then the following businesses will likely go into other more lightly regulated institutions 

or new startup companies’’—yes or no, was that considered? 

Mr. PINSCHMIDT. That is not part of the statutory factors. The 

Council is focused on risk identification— 

Mr. DELANEY. So downstream risk that is created from a designation, right—because if you designate a company and it is really 

big, and because of your designation it cuts itself in half and it 

spins off a bunch of businesses and it gets spun off to small, lightly 

capitalized, lightly regulated businesses—the risks associated with 

that are not factored into the designation. That is what I am hearing, at least. 

Mr. PINSCHMIDT. Certainly, if that were to be the case, it would 

be something that would be looked at across the broader Council 

work streams and efforts. But in terms of the actual designation 

decision, the statute is very clear that the Council has to focus on 

risk identification and the Federal Reserve Board is responsible 

for— 

Mr. DELANEY. It doesn’t sound like a very balanced risk approach, at least in my judgment. 

I yield back. 

Mr. FITZPATRICK. Mr. Bachus, the chairman emeritus of the full 

Financial Services Committee, is recognized for 5 minutes. 

Mr. BACHUS. Thank you. 

Welcome, Deputy Secretary. You concluded your oral testimony 

by saying the Council has received a number of suggestions regarding the process for evaluating nonbank financial companies, and 

that you expect that the Council will consider any potential 

changes in the coming months. I applaud that statement. 

And I wanted to point out to you that Mr. Neugebauer and I, in 

2012, asked for a GAO study, and they reported back that DoddFrank requires the FSOC to periodically reevaluate its designations of nonbank financial companies. Are you aware of that requirement in Dodd-Frank? 

Mr. PINSCHMIDT. Congressman, I believe you are referring to the 

Council’s intent to review at least every 5 years the metrics for 

stage one, in terms of kind of the initial threshold for companies 

that would be considered. 

Mr. BACHUS. Also, they actually said that you will conduct a 

comprehensive assessment to determine whether the designations 

are having the intended impact. Well, no, they said that you don’t 

have to do that. I’m sorry. 

18 

But they suggested that it would be a good idea that you conduct 

an assessment after you have made the designation to see whether 

that designation is having the intended consequence of improving 

financial stability of the company and any risks that they might 

have. Congressman Ross and Congressman Delaney, who was just 

asking questions, have introduced a bill that I am cosponsoring 

which calls for an assessment of intended impact, which has been 

suggested by the GAO. 

Of course, AIG, G.E, and Prudential already have those designations made, with perhaps more on the way. Wouldn’t you agree 

that it may be very helpful and important to know whether the 

designations are having the intended consequences, or whether 

maybe they are even having some negative consequences? 

Mr. PINSCHMIDT. Congressman, certainly we share, I think, your 

goal on that. The Council, across all different markets, and particularly with some of the largest institutions, is constantly monitoring 

as to how things are playing out. Specifically for designated entities, I would note that there is an annual review process of each 

designation that takes place, and that would—clearly we are not 

that far away from the initial designations, but you could imagine 

scenarios going forward as company businesses change, risk profiles change, market functioning change— 

Mr. BACHUS. Do you make those public? Do you mean that every 

year you will review the designations, and part of that is whether 

they are having positive or negative implications— 

Mr. PINSCHMIDT. The annual review is consistent with the Council’s statutory authority here focused more on the risk identification, and that would logically encompass what has happened to the 

profile of the firm, how are they engaging with other market players, are there any material changes in their business model and 

their riskiness. 

Mr. BACHUS. Right. But do you understand what I am saying? 

Wouldn’t it be a good idea once the designation is made maybe on 

that annual basis to also say, ‘‘Okay, after we made this designation, this is what has happened, these are some positives, these 

may be some negatives,’’ where you could adjust, or at least reconsider whether or not the designation was even helpful? 

Mr. PINSCHMIDT. Certainly in terms of how the designation impacts market functioning and these specific firms, that is considered on an annual basis. 

Mr. BACHUS. Okay. 

Mr. PINSCHMIDT. I think to the general questions of market functioning, that encompasses ongoing work at the Council— 

Mr. BACHUS. I would just say maybe take a look at that legislation and give me your thoughts on it, and Mr. Neugebauer, and 

maybe Mr. Ross, and Mr. Delaney. It is a bipartisan thing. 

Let me go quickly to AIG. Mr. Fitzpatrick was talking about the 

runnability, and we know that was a credit default swap thing 

where they wrote $430 billion, $440 billion worth of credit default 

swaps; they didn’t buy any. A lot of people bought and sold. 

So that didn’t impair their insurance operations until their credit 

rating changed. They had a tremendous credit rating problem, and 

that then did impact their insurance. And I can understand that 

designation if you have somebody doing something over here which 

19 

may be dangerous, cause credit rating problems, and then impact 

their insurance market. 

I am not sure how that would go with a Prudential or a MetLife, 

and I just point that out to you. AIG really wasn’t an insurance 

problem; it was a gambling problem. And it was being on one side 

of the market with $440 billion worth of debt and no money to back 

it up if it failed. I don’t see that with G.E., Prudential, or MetLife. 

If you would like to respond? 

Mr. PINSCHMIDT. What I would note is that each designation is 

company-specific. There is a core group of—there are 10 statutory 

considerations in a 6-category framework that comes into play, but 

the factors that are looked at at each company are very companyspecific. 

And, generally speaking, it is a combination of issues. It is never 

one thing, or it hasn’t been thus far one thing. So I would just note 

that, again, it is a company-specific analysis and it would be hard 

for me to kind of generalize. 

Mr. BACHUS. Thank you. 

Mr. FITZPATRICK. And the gentleman’s time has expired. Thank 

you. 

Mrs. Beatty is recognized for 5 minutes. 

Mrs. BEATTY. Thank you so much, Mr. Chairman, and Ranking 

Member Green. 

And thank you to our witnesses today. 

We have talked a lot about being designated this morning as an 

SIFI, so let me ask you these two questions: Last night, a couple 

of my staff were singing the words to ‘‘Hotel California,’’ and one 

of them said, ‘‘Is this a Hotel California scenario, where once designated a company, will you remain an SIFI forever?’’ 

If so, why? And if not, can you describe to me the process of review, including the frequency and high-level considerations in this 

review? 

Mr. PINSCHMIDT. Thank you for that question. Maybe if I could 

step back here and then sort of briefly outline the process of review 

of companies for designation. 

It is a three-stage process. Stage one is purely mechanical, based 

on metrics and thresholds. To the extent a company triggers those 

metrics, it automatically goes to stage two. 

And stage two is viewed as solely very preliminary. It will be— 

Council member agencies will pull the 10-Q if it is a public company, understand the company, do some initial analysis, and understand to the extent that there are potential risks here what 

might they be or what areas would there be opportunities for further investigation and understanding. 

To the extent that there is sufficient rationale to move a company to stage three, there is a vote by the Council on that action. 

And once a company is moved to stage three, that is when the real 

work and engagement begins with the companies under consideration. 

The companies are notified at the beginning of that process. As 

part of that notification there is a detailed information request, 

numbering up to 10 pages long, with potentially 100 to 150 different questions. 

20 

And that begins a very long, robust back-and-forth between the 

Council and the company on just drilling down on the business, understanding the risks. There is a lot of opportunity for the company 

throughout that process to engage with the Council, to ask questions. And certainly based on the information that the Council is 

requesting of the company and the nature of the review, the company will get a sense for what the Council is interested in focusing 

on. 

So then closing out stage three, there is a vote on a proposed determination. If there is a proposed determination, then at that 

stage the Council delivers to the company a very lengthy basis outlining the reason why the Council is concerned or the factors that 

the Council is highlighting in its analysis. 

And that is very important because it provides the company the 

opportunity to sort of understand where the Council is, to level set, 

what are the key issues, what are the concerns. To the extent that 

they feel the Council is looking at the wrong thing or is misguided, 

they can address that. 

There is an opportunity for an oral hearing before the principals 

of the Council. The one company that chose to accept that offer 

came in, presented its case, again had a robust back-and-forth. All 

the principals of the Council were there and the Council took that 

information, incorporated it into its thoughts, and then, only then, 

was there a final vote. 

So, it is a very lengthy process from that standpoint. 

Mrs. BEATTY. Okay. 

Mr. PINSCHMIDT. And then in terms of your initial question on 

sort of, once you are designated, what happens next, there is judicial review of a designations decision, and then annually the Council does evaluate the decision. So to the extent that the company’s 

risk profile, footprint, and market dynamics change, and they rise 

to a certain level of materiality, then that would certainly come 

into play. 

Mrs. BEATTY. Okay. I have a second part, and the clock is running out. I have several insurance companies in my 3rd Congressional District of Ohio. If one of my local State domicile’s insurers 

were designated, can you briefly explain to me what the process 

would be of determining issues of regulatory jurisdiction between 

the Ohio Department of Insurance and the Federal Reserve? 

Mr. PINSCHMIDT. Yes. The role of the Council is on risk identification. Once a company is designated, they are subject to consolidated supervision by the Federal Reserve. That supervision, as I 

understand it, will be mainly focused at the holding company level 

and understanding the profile of the firm; it will not necessarily encompass some of the insurance activities and individual insurance 

subs. 

Mrs. BEATTY. And lastly, will the Federal Insurance Office be involved in providing the guidance to the Fed? Because under DoddFrank Section 120, FSOC has recommendation authority. 

And we are out of time. 

Mr. FITZPATRICK. The gentlelady’s time has expired. 

Mr. Hultgren is recognized for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

21 

First question to Mr. Pinschmidt: I am told that during a Democrat staff briefing last week you told their staff that the FSOC 

principals would not meet with the entities that are under consideration for SIFI designation until an actual stage three designation 

was recommended. In practice, this means that companies will not 

have an opportunity to bring their case to the voting members until 

the eve of the designation, and after the decision is essentially 

made. 

The Wall Street Journal reports that the FSOC has followed this 

informal policy with the two asset managers that are reported to 

be under consideration for SIFI designation. These groups have not 

been able to meet with the FSOC principals or even get confirmation from anyone at the FSOC that they are even under consideration. 

How is it not contrary to basic standards of administrative procedure and due process for policymakers to draw what amounts to 

policymaking conclusions prior to the complete consideration of relevant facts and public input? 

Mr. PINSCHMIDT. In terms of the interactions with companies 

during the designations process, in stage three, which I believe you 

are referring to, there is significant interaction between the Council 

member agencies and the companies that extends for a very 

lengthy period of time. There are significant meetings; there are 

conference calls; there is information flow in both directions. 

And then after a proposed determination, the company has the 

opportunity to request an oral hearing, and the Council has noted 

that it expects to grant all requests for oral hearings. But more importantly, as part of that oral hearing, the company does receive 

a very detailed basis—sometimes 200 pages long—outlining the 

Council’s key concerns about the company and providing the company an opportunity to respond. 

Mr. HULTGREN. Your policy, to me, appears to be in direct violation of due process. It feels like the decision has already been 

made. There may be hearings after that point, but for them not to 

hear sooner than the designation seems like a direct violation of 

administrative procedure. 

Let me move on. 

Is FSOC aware that the New York Superintendent of Financial 

Services, which is MetLife’s chief regulator, wrote Treasury Secretary Lew on July 30, 2014, to encourage FSOC to reconsider a 

formal SIFI designation for MetLife? Mr. Lawsky argued against 

an SIFI designation because: one, MetLife does not engage in noninsurance activities that create an appreciable systemic risk; two, 

in the event that MetLife or one or more of its insurance subsidiaries were to fail, DFS and other regulators would be able to ensure an orderly resolution; and three, MetLife is already closely 

and carefully regulated by DFS and other regulators. 

Is it not concerning that MetLife’s chief State regulator, who is 

no doubt intimately familiar with the company’s business portfolio 

and any relevant risks, is so adamant against an SIFI designation? 

Will you commit to factoring his concerns into any final designation 

decision of the company? 

Mr. PINSCHMIDT. Congressman, unfortunately, I can’t comment 

on letters relating to actions that haven’t necessarily been taken by 

22 

the Council. What I can note is that as part of the work of the 

Council on the designations authority, there is broad consultation 

not just within the Council and the members of the Council, but 

also at the State level. 

Mr. HULTGREN. Mr. Pinschmidt, has FSOC conducted any analysis to determine how applying risk-based capital standards to insurers will affect the amount of coverage that insurers can offer? 

Could this ever cause the cost of insurance to rise to a prohibitive 

level? May there come a time when it is impossible to obtain certain kinds of insurance coverage because insurance companies that 

have been subjected to bank-like capital standards simply won’t be 

able to afford to offer it? 

Mr. PINSCHMIDT. Congressman, on that front, the Council is focused on risk identification. The enhanced prudential standards for 

insurance companies or designated entities will be developed by the 

Federal Reserve Board. My understanding is that they will make 

efforts to tailor them to the specific characteristics of the insurance 

industry, but as part of that process, I would expect there would 

be some consultation with the Council. 

Mr. HULTGREN. I hope there would also be a consideration of the 

risk to consumers of losing options—insurance options—that could 

be there because of your activity driving up the significant cost to 

insurance companies. Certainly, that would be a more significant 

risk to the marketplace. 

Let me finish up with one last question. Should FSOC show 

greater deference to an industry’s primary regulators in making 

SIFI designation decisions? 

Mr. PINSCHMIDT. Certainly the Council looks to regulators and 

its members with industry expertise to hear that expertise as part 

of the discussion. The nature of individual company designations, 

however, encompasses broader market dynamics. 

The companies that are considered do not necessarily solely impact the companies within their industry. They can impact market 

functioning across asset classes, across industries. Therefore, it is 

also appropriate to hear the viewpoints of the broader Council 

members. 

Mr. FITZPATRICK. The gentleman’s time has expired. 

Mr. HULTGREN. My time has expired. 

I yield back. Thank you. 

Mr. FITZPATRICK. Mr. Heck is recognized for 5 minutes. 

Mr. HECK. Thank you, Mr. Fitzpatrick—Mr. Chairman. Has a 

nice ring to it, sir. 

Ms. Clowers, I have this bias that we are always fighting the last 

war with the last approach. It is like we are driving with our eyes 

transfixed in the rearview mirror. 

That is why I was so intrigued by part of the language in your 

report, if I may quote briefly, ‘‘Second, in 2012 we recommended 

that FSOC develop more systematic, forward-looking approaches 

that would help in separating emerging threats to financial stability from more current risk and prioritizing them in its annual 

report. Since then, FSOC made some progress in addressing this 

recommendation but could do more.’’ 

Would you give a specific and concrete example of how they could 

do more in this regard? 

23 

Ms. CLOWERS. Certainly. In looking at the most recent annual reports, it does look like they have become more focused in terms of 

identifying current and emerging threats. But still, they continue 

to report them together and they are not prioritizing those threats. 

And in talking to FSOC officials, they don’t plan to prioritize the 

threats because they realize that could direct people’s attention to 

certain areas. 

But that is exactly what we think should happen. There is not 

infinite, limitless resources, both among the regulators and the 

companies, and providing more specifics in terms of the priorities 

of the threats would be helpful in directing scarce resources. 

Mr. HECK. So you think they should separate current from 

emerging and prioritize them? 

Ms. CLOWERS. Correct. 

Mr. HECK. When it relates to emerging threats, again, be specific 

and concrete, how would they go about that analysis and evaluation? Give me an example of the kind of thing that might manifest 

itself in that regard, if you would, please. 

Ms. CLOWERS. Certainly. Start with what we have seen in the 

past is, for example, the debt of the government is listed as an 

emerging threat, when it was—I think it was listed in 2012 when 

most anyone who was reading the papers could realize that was a 

current threat. 

There are also threats that would come and go off the list without any explanation of why. For example, modeling risk of different 

companies—it had appeared one year, wasn’t there the next year, 

so you don’t know why. 

To go to your question about how they could do a better job, it 

is using the tools that are under development, particularly the financial stability monitor that is a promising tool to develop a common set of indicators that would look across the system. But again, 

it must be forward-looking. 

To date, those—the metrics aren’t forward-looking and goes to 

your point. It is looking at sort of what we know today and not 

what we know could happen in the future. 

Mr. HECK. Right. Thank you. 

Mr. Pinschmidt, why don’t you keep transcripts? 

Mr. PINSCHMIDT. The meeting minutes that are produced by the 

Council generally serve as the official record of the— 

Mr. HECK. They are not transcripts. Why don’t you keep transcripts? 

Mr. PINSCHMIDT. Congressman, the challenge for the Council is, 

there is a clear recognition that transparency is important, and we 

have taken a number of steps over the years to improve our transparency— 

Mr. HECK. Mr. Pinschmidt, why don’t you keep transcripts? 

Mr. PINSCHMIDT. As I was trying to note, the obligation to transparency has to be balanced with an obligation to protect confidential, supervisory information. The nature of the Council meetings 

involves generally very highly sensitive, confidential company information, broader industry information— 

Mr. HECK. So does the FOMC. They keep transcripts but they retain them for a period of time. Why don’t you keep transcripts? 

24 

Mr. PINSCHMIDT. The practice has been to have the official minutes serve as the record for the Council— 

Mr. HECK. Why don’t you keep transcripts? 

Mr. PINSCHMIDT. Congressman, the practice has been to have the 

minutes serve as the official record for Council meetings. 

Mr. HECK. So what I am hearing you say is you choose not to 

keep transcripts. 

Mr. PINSCHMIDT. The official minutes have served in that capacity. 

Mr. HECK. No, they do not. Official minutes are not transcripts. 

Mr. PINSCHMIDT. Congressman, I recognize your concerns on this, 

but the challenge for the Council is, the Council is charged with 

looking across markets, looking across institutions, discussing systemic risk. Those conversations, by their very nature, are very sensitive and confidential and— 

Mr. HECK. So do you believe they are—you literally believe they 

are even more sensitive than what the FOMC discusses? 

Mr. PINSCHMIDT. I really can’t comment on the— 

Mr. HECK. Well, they are not. And you should keep transcripts. 

I yield back the balance of my time. 

Mr. FITZPATRICK. The gentleman yields back. 

The Chair recognizes the gentleman from Pennsylvania, Mr. 

Rothfus, for 5 minutes. 

Mr. ROTHFUS. Maybe if we can continue with that line that my 

colleague was asking about on transcripts, I mean, transcripts can 

be kept confidential, can’t they? 

Mr. PINSCHMIDT. I am not really sure about that. I really have 

no basis to respond there. 

Mr. ROTHFUS. When FSOC proposes to designate a company as 

an SIFI and there are meetings being held at FSOC to discuss 

that, there is going to be an exchange of ideas and comments back 

and forth, I would assume, yes? 

Mr. PINSCHMIDT. Yes. So, Congressman, certainly in terms of individual proceedings regarding individual companies, the Council 

makes every effort, particularly in stage three, to communicate 

with the company, have a two-way conversation, make sure that 

the— 

Mr. ROTHFUS. Is the company there, though, when you are discussing whether or not to designate it as an SIFI, internally? 

Mr. PINSCHMIDT. After a proposed determination the company 

has the opportunity to present to the entire Council— 

Mr. ROTHFUS. But are they there when you are making the determination and the conversations are going back and forth among 

the committee members? 

Mr. PINSCHMIDT. Certainly the substance of the many company 

meetings with the Council member agencies and, in fact, presentations— 

Mr. ROTHFUS. I am talking about when the determination is 

being made among FSOC members. And that is where we are wondering about what the conversations are. And that is why we think, 

personally, that it is important to have a transcript, so that after 

the designation is made and the company wants to come in and 

find out what was going on, they can look at the transcript. 

Wouldn’t that be fair? 

25 

Mr. PINSCHMIDT. In terms of the record for the company, the 

Council provides a 200-page document to the company before a designation has been made. 

Mr. ROTHFUS. But the company is not going to have access to the 

internal deliberations of the committee if they can’t be looking at 

transcripts of what was going on. 

Mr. PINSCHMIDT. But the company will have access to the key 

concerns and factors cited in the Council’s proposed determination 

and has an opportunity to respond to that. 

Mr. ROTHFUS. Ms. Clowers, GAO made many recommendations 

to FSOC in its 2012 report that would assist in shedding some 

light on the way FSOC makes its decisions. In your written testimony you get into some of this, but could you tell us how many 

have been implemented to date? 

Ms. CLOWERS. We have seen progress on a few of the recommendations dealing with, for example, the communications with 

the public, redesigning their Web site. They have also made more 

information or more timely notices of their meetings with the public. We also saw steps in terms of trying to enhance collaboration 

among their committees by developing bylaws for their Deputies 

Committee, which we think is an important step. 

But as I said in my oral statement, we believe additional work 

is needed on a number of the issues you are highlighting, from 

transparency and accountability issues. 

Mr. ROTHFUS. So specifically, what recommendations haven’t 

been implemented? 

Ms. CLOWERS. To date, we have not closed any of the recommendations. We continue discussions with the Council on all of 

them. 

For example, on the issue of the transparency that you have been 

discussing in your comments, we continue to look for additional 

steps by the Council to enhance the transparency of their decisionmaking. For example, with the minutes, if they are transcribed, 

that would provide a record not only for transparency but accountability, as you are suggesting, for future decision-makers to go back 

and to have a better understanding of the deliberations. 

Mr. ROTHFUS. One of the recommendations that you made was 

for FSOC to more fully incorporate key practices for successful collaboration. I think that would mean that FSOC should engage with 

regulators, industry, and academics. Has FSOC done this, from 

your perspective? 

Ms. CLOWERS. They have taken some steps to enhance collaboration. I know they have had different industry in for meetings, from 

asset managers to others. We continue to look for additional steps 

to be taken. 

Part of that recommendation was for FSOC to play a greater role 

in coordinating rulemaking among member agencies. We think, 

given FSOC’s position of bringing together all the member agencies, they have an opportunity to create a forum for that type of 

discussion. 

Mr. ROTHFUS. Mr. Pinschmidt, is FSOC in the process of implementing any of the outstanding recommendations? 

26 

Mr. PINSCHMIDT. Yes. What I would say is, we certainly value 

the work of the GAO. They bring a very important perspective to 

our work and— 

Mr. ROTHFUS. Which of the outstanding recommendations are 

you in the process of implementing? 

Mr. PINSCHMIDT. I think we are continuing to talk to them about 

all of them. And we have taken some steps on a number of their 

recommendations. 

Mr. ROTHFUS. Can you tell me one of them that you are currently 

implementing? 

Mr. PINSCHMIDT. I would point to, back in May the Council revised its transparency policy. That was a result of a months-long 

review based largely on the GAO input. And as a result of that review, what we do now is we post meeting agendas one week in advance, and on the day of an actual meeting we provide a readout 

detailing what was discussed— 

Mr. DUFFY [presiding]. The gentleman’s time has expired. 

The Chair now recognizes the gentleman from Nevada, Mr. 

Horsford, for 5 minutes. 

Mr. HORSFORD. Thank you, Mr. Chairman, and Ranking Member 

Green. 

I want to thank both of the witnesses for being here today, and 

I really associate myself with the comments of my colleagues on 

both sides of the aisle about the need for review of some of the 

methodology as well as greater transparency and improvement in 

that area. 

I do want to shift my question, though, to an area that has not 

been discussed yet this morning, which is one of the fundamental 

issues that led to the economic collapse in 2008, and that was the 

housing crisis. I am from Nevada and our housing market has still 

not recovered; we have the most unstable housing market in the 

country, with about a third of our homes at every income bracket 

upside down in value, some of them as high as 50 percent or more. 

It is my understanding that the GAO report, in its most recent 

report, noted that the FSOC should develop a systematic approach 

to identify potential threats to the financial stability. 

So, Mr. Pinschmidt, as you continue to look at threats to the 

market’s financial stability, can you assure us that the health of 

the housing market will not be ignored? And what strategies is the 

FSOC pursuing in that respect? 

Mr. PINSCHMIDT. Certainly. The housing market has been something that has been highlighted 4 years running in the Council’s 

annual report, and there is clearly more work to be done there in 

terms of the actual recovery, but also in sort of building out the 

structural mechanisms in the housing market following the collapse in 2008 and 2009. 

In terms of the annual report, it is something that recognizes 

when there is a risk that is outstanding and needs to be addressed, 

and it serves as a good barometer for what the Council is focusing 

on. So to the extent that this has been highlighted as a recommendation 4 years running now clearly indicates that this is a 

priority and ongoing work. 

Mr. HORSFORD. And so, what is being done? What discussions, 

what review? You said that one of the 40 meetings that you had 

27 

was on the housing finance reform. What areas have you pursued 

and what recommendations are coming from that analysis? 

Mr. PINSCHMIDT. There are two sides to, generally, the Council’s 

engagement on this issue. Clearly, there are a number of staff 

working groups and regulators with specific equities in this. There 

is the structural issue, in terms of housing finance reform, and 

then there is the broader issue, which I think you were alluding 

to, in terms of the very slow recovery and the impact on consumer 

spending, the impact on the economy, and broader issues. So, it is 

a two-front process. 

Mr. HORSFORD. Ms. Clowers, what would you suggest, from the 

GAO perspective, on this issue of the housing crisis as an emerging 

issue that is still very much a priority, or should be, for the FSOC 

to be working on? 

Ms. CLOWERS. I think it goes to our recommendations about the 

need to develop a systematic and comprehensive approach to identifying both current and emerging threats, that developing a common set of indicators across the system would allow regulators to 

determine where there might be threats emerging. And I would encourage FSOC to continue to work with OFR to develop those tools 

so they are risk-focused and forward-looking. 

Mr. HORSFORD. Thank you. 

I would like to also ask about an issue that I have heard from 

one of our major industries in Nevada, which of course is gaming, 

and the fact that there is some concern that as a nonbank industry 

that does issue credit in the course of their business, that this is 

an area where FSOC may be pursuing. Can you give me some indication of what FSOC is thinking from the perspective of a major 

industry like gaming? 

Mr. PINSCHMIDT. I can’t really comment specifically, but what I 

can note is the only nonbanks that are eligible for designation— 

and obviously there are other metrics and thresholds, but there has 

to be initial determination that 85 percent of revenue or gross assets are in the business of finance or financially related. So I am 

not sure if that applies to the particular example that you noted, 

but I would throw that out there. 

Mr. HORSFORD. Okay. From a transparency standpoint— 

Mr. DUFFY. The gentleman’s time— 

Mr. HORSFORD. —it would be helpful to get that information out, 

because there are concerns. 

Mr. DUFFY. The gentleman’s time has expired. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr, for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. 

Mr. Pinschmidt, moral hazard is a common justification for regulation, but it can also be exacerbated by government intervention. 

A criticism of the SIFI designation process is that being officially 

identified as too-big-to-fail can actually increase the moral hazard 

by incentivizing increasingly risky investments since taxpayers, 

and not shareholders or creditors, are likely to bear the costs. 

Is it possible that an SIFI designation or a designation for enhanced prudential supervision would actually exacerbate moral 

hazard for an investment fund, for example, rather than reduce 

that risk? 

28 

Mr. PINSCHMIDT. The nonbank designations authority is designed 

to actually recognize where companies are large, interconnected, 

and where their material financial distress could pose a risk to financial stability. It is not designed to prevent material financial 

distress. 

What happens after a designation is the Federal Reserve Board 

issues enhanced prudential standards, and those are designed to 

basically put some safeguards in there. To the extent that the company was to get into trouble, they would have more capital. 

But also, there are other efforts that come into play, too. If failure is inevitable, then there is a resolution authority and living 

wills, and those are designed to manage that failure in a more effective way by limiting the collateral consequences— 

Mr. BARR. But what about this idea that designation as an SIFI 

actually would have the potential to increase risk because you are 

giving that institution a special designation that provides a layer 

of protection from the taxpayer and not from shareholders or creditors? 

Mr. PINSCHMIDT. The tools that come into play after designation 

are designed to basically make it so that a company can fail without threatening financial stability. 

Mr. BARR. Let me just shift gears here. Putting aside kind of exotic insurance products like credit default swaps, for traditional insurance activities like life insurance, how would traditional insurance activities pose a systemic risk to the financial system? 

Mr. PINSCHMIDT. The Council, in its evaluation of certain insurance companies under Section 113, that has been a company-specific exercise, looking at the nature of those companies, the nature 

of their interaction, the leverage, the balance sheet exposure, understanding the impact of those specific companies if they were to 

get into trouble and fail and what would that impact be on the 

broader financial system. It didn’t necessarily take into account 

specific activities; it was more company-focused. 

Mr. BARR. Well, okay. If it is company-focused and you have a 

hypothetical company that, again, does not engage in exotic insurance products like a credit default swap, like an AIG, but it is just 

a traditional life insurance company, would FSOC in any circumstance view that as a systemically risky company? 

Mr. PINSCHMIDT. It is all situational-dependent, as you can imagine. I think the key threshold for an FSOC designation is if that 

company’s failure—it is—designation doesn’t sort of contemplate, 

‘‘Is the company likely to fail? Is there something going wrong?’’ It 

doesn’t take any of that into account. 

It is, ‘‘What happens if a company is failing? What would be the 

impact on the broader market system?’’ And certainly activities can 

come into play on that, but generally speaking, for the companies 

that have been evaluated thus far, it has been on the company-specific factors. 

Mr. BARR. Final question—I want to talk about the Form PF, 

which has been described to me as a very onerous form. It is a form 

that I am told asset managers must provide to the SEC, the CFTC, 

and FSOC for systemic risk assessments. And the data that is required in filling out these forms and submitting these forms is apVerDate Nov 24 2008 18:05 Jan 30, 2015 Jkt 091162 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 K:\DOCS\91162.TXT TERRI
29 

parently very voluminous and there are no clear procedures for 

how these forms are used by the relevant agencies. 

So the question is, who is reviewing these forms? Are they materially beneficial to the regulators and to FSOC in terms of evaluating systemic risk? Because there is apparently tremendous cost 

associated with assembling and reporting the data associated with 

these so-called Form PFs. What is the benefit and what is happening with that submitted paperwork? 

Mr. PINSCHMIDT. Congressman, in terms of the Form PF, those 

are submitted by the—generally the hedge fund industry to the 

SEC. 

Mr. DUFFY. The gentleman’s time has expired. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, for 5 minutes. 

Mr. GARRETT. Thank you. 

I just have a couple of questions. In Ms. Clowers testimony she 

states, ‘‘Even if FSOC determines that some information should not 

be made public, its current practices do not provide detailed 

records even for policymakers, including members of FSOC, to assess decisions.’’ Not only do I find that appalling, but obviously 

from a bipartisan perspective, members from both sides of the aisle 

find it appalling that more information does not come out and the 

transcripts do not come out. 

So, first question: Who made the determination that detailed information and the transcripts would not be kept? Who was the person who made that determination? 

Mr. PINSCHMIDT. Congressman, the practice of the Council has 

been— 

Mr. GARRETT. I know the practices. Someone had to make the decision. Did you make the decision to do that—to keep it secret? 

Mr. PINSCHMIDT. Congressman, I think it is a reflection of the 

nature of the— 

Mr. GARRETT. Did they have a vote on it at some point in time? 

Mr. PINSCHMIDT. If there was a vote, that would have been disclosed. 

Mr. GARRETT. Okay. So there was never any vote, it just—you 

never did it. 

You have heard from both sides of the aisle that we believe that 

information should be heard. Did you hear that from both sides, 

from Democrats and Republicans just now? 

Yes. That is a yes. 

Will you go back and now look in to see how this information can 

be kept confidential in the manner that you think it needs to be 

kept confidential but still provide the transcripts? Will you make 

that commitment to us today? 

Mr. PINSCHMIDT. Congressman, what I will say as part of my remarks, in terms of my oral statement, was that the Council is a 

young organization— 

Mr. GARRETT. Will you go back and make that recommendation 

to do so? 

Mr. PINSCHMIDT. We recognize that there are areas that we— 

Mr. GARRETT. Will you make that recommendation—I just need 

a yes or no. 

30 

Mr. PINSCHMIDT. I can go back and get you more information if 

that would be helpful. 

Mr. GARRETT. So you are going to keep it secret until some future date. 

You also talked, as far as other secret information that you continue to keep is with regard to the annual review. You told us what 

the annual review is and you said you have already reviewed some 

of these companies and you actually did it with—for G.E. and Prudential I believe, right? 

That is a yes? 

Mr. PINSCHMIDT. That is correct. 

Mr. GARRETT. That is right. 

For their annual review, I think, as far as I can tell, you simply 

sent out a notice to these companies saying that, ‘‘You are still an 

SIFI.’’ Is that basically correct? 

Mr. PINSCHMIDT. After the review, that is correct, yes. 

Mr. GARRETT. After the review. Was the review the exact same 

process that you had for the initial review? In other words, did you 

go through the entire three-stage process, allow the executives to 

come back in and sit down and go through all that information 

again? 

Mr. PINSCHMIDT. The annual review was based—again, we are 

sort of in a unique situation here because it was just under 12 

months after the— 

Mr. GARRETT. Okay. 

Mr. PINSCHMIDT. —initial designation— 

Mr. GARRETT. Right. 

Mr. PINSCHMIDT. —but the annual review— 

Mr. GARRETT. That is annual, 12 months. 

Mr. PINSCHMIDT. Yes. So the annual review took into account the 

key factors that weighed on the decision to designate. 

Mr. GARRETT. So they don’t get a chance to come back on each 

annual review to say, ‘‘Well, this is our interpretation of this, and 

this is our interpretation of that?’’ 

Mr. PINSCHMIDT. Each company is provided—before the annual 

review commences they are notified and they are offered the opportunity to submit information and— 

Mr. GARRETT. Submit information, but it is not the exact same 

process as the first time around, to come in with the staff and what 

have you and sit down and go through it, just as you said for the 

first time? 

Mr. PINSCHMIDT. At this stage, it is a different spot. 

Mr. GARRETT. Will you recommend that it be changed back so 

that the annual review is commensurate with the first review? 

Mr. PINSCHMIDT. Congressman, certainly the spirit of your remarks and the suggestion about ways to improve, I think the 

Council is taking a lot of that in, and to the extent that there are 

ways to improve certain processes, including annual— 

Mr. GARRETT. The Council is taking a lot into review. Ms. 

Clowers and others have made recommendations, but it doesn’t 

seem that—you may hear them, but you may not implement them, 

is our concern. 

When you make this analysis for these companies and others and 

you are looking at across the horizon, as far as systemic risk, one 

31 

of the items we heard from another panel is the ad hoc nature of 

intervention by the Fed, under Section 13-3 in the last case, that 

led to uncertainty in the marketplace. Is that something you look 

at too, as far as you look across the horizon as far as systemic risk 

potentialities—the ad hoc nature of the implementation of 13-3 by 

the Fed? 

Mr. PINSCHMIDT. So you are referring to the use of 13-3 during 

the crisis? 

Mr. GARRETT. That is what they did in the past, and they saw 

that that ad hoc nature some economists said led to the uncertainty in the marketplace and exasperated things. So now going 

forward, understanding that the Fed still has those powers, do— 

in a changed manner under Dodd-Frank, of course—do you look at 

that as being a potentiality for a systemic risk going forward? 

Mr. PINSCHMIDT. There is certainly a number of factors that are 

considered as part of the designation process, and— 

Mr. GARRETT. I am not talking about the designation process, per 

se. I am looking into seeing what the Fed’s powers are and how 

that may cause a systemic risk. 

Mr. PINSCHMIDT. That is not something I am directly familiar 

with, no. 

Mr. GARRETT. You are not just looking at companies. Your own 

analysis shows that you are looking at monetary policy and other 

governmental policies and spending and what have you. You look 

at all those things, don’t you? 

Mr. PINSCHMIDT. Yes, to the extent certain issues impact the financial functioning and— 

Mr. GARRETT. So is 13-3 one that you look at? 

Mr. DUFFY. The gentleman’s time has expired. 

Mr. GARRETT. Could he just answer— 

Mr. DUFFY. The gentleman may answer the question. 

Mr. PINSCHMIDT. I can certainly get back to you on that one. 

Mr. GARRETT. Thank you. 

Mr. DUFFY. The Chair now recognizes the gentleman from Texas, 

Mr. Green, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. 

And I thank the witnesses for appearing. 

I would also like to thank the staff for the outstanding job that 

they have done in preparing us for this hearing. 

Much has been said about insurance companies—about them 

being regulated, about them having oversight. And to some extent, 

I think these are some statements that merit a lot of credibility. 

But we also have to remember that AIG was an insurance company. AIG was a regulated insurance company. AIG was also engaged in capital markets, credit default swaps, derivatives. 

FSOC exists in great part because of an insurance company, 

AIG, that was ostensibly holding the world together. It is unbelievable what the length and breadth of AIG’s involvement in capital 

markets was. And I thank God we have an FSOC that can look 

across the entire spectrum and spot the AIGs of the world before 

they become a systemic risk and have an enormous impact on our 

economy. 

This process that FSOC has is something that Congress accorded 

it, for the most part, in that if a company is displeased with the 

32 

decision, that company has the right to appeal. So it doesn’t have 

to live with what FSOC concludes; it can appeal. 

A part of that process means that you go back to FSOC itself, 

but that is not unusual. In court when you file a motion for a new 

trial, the judge who heard your case is the judge who determines 

whether you should get a new trial. If you appeal beyond that, you 

can go to a district court, Federal district court. We trust the court 

system in this country. 

Appeal is a process that every person has if you are sued or if 

you file suit and you don’t like the decision. And it is interesting 

to note that when people lose, people appeal. They don’t always win 

when they appeal, but they can appeal. 

And corporations are people, my friends. Corporations do what 

people do. When they lose, they appeal. This doesn’t mean that 

FSOC hasn’t done its job because a corporation is disenchanted 

with the process or disenchanted with an appeal. That is what happens. That is the American way. 

Let’s talk for just a moment about who really is impacted by 

what we are doing today, because to listen to what is being said, 

you would think that this is a big dispute between mega corporations and the government. But this is really about people. 

It is about the people who had their homes foreclosed on—3.2 

million of them when we had the crisis. And by the way, minorities 

were disproportionately impacted. Seventy percent of AfricanAmericans were likely more impacted with foreclosures when this 

took place. 

$3.7 trillion in real estate wealth lost. That hurt schools. That 

was an impact on the tax base. 

This is what we are trying to protect with Dodd-Frank and 

FSOC—people, not mega corporations, not the AIGs of the world. 

We are trying to look into them and make sure they don’t do what 

was done again. 

26.2 percent in pension value lost. $7.4 trillion in stock market 

wealth lost. That is about $66,200 per household. 

These are real people who suffered. I was there when we took 

that vote on TARP, and I saw the stock market as it took its 778- 

point decline. I got the calls the next day from people who were 

talking about their 401Ks. 

Real people suffer. This is about more than mega corporations 

doing battle with the government. Evictions: with 8.8 million jobs 

lost, people got evicted. 

I stand with the people, and I stand for FSOC doing its job because if it doesn’t, real people will be hurt. 

Thank you, Mr. Chairman. I yield back. 

Mr. DUFFY. The gentleman’s time has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Royce, for 5 minutes. 

Mr. ROYCE. Thank you very much, Mr. Chairman. 

And I appreciate Mr. Pinschmidt being with us today. I will go 

back to something that Chairman McHenry mentioned, and that 

was following the FSOC’s July 31st meeting, the Council announced that it would take a more focused analysis of industrywide products and activities, and in the asset management indusVerDate Nov 24 2008 18:05 Jan 30, 2015 Jkt 091162 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\91162.TXT TERRI
33 

try they would do this this way rather than designating specific 

asset managers as systemically risky. 

So it is my understanding there has been a working group set 

up, or maybe about to be set up, to look at these products and activities. I have maybe five questions here that I would just ask you, 

and then you can give me your response. 

But if you want to list these as I go through them, the first 

would be, can you tell us the makeup of that working group, and 

the timeline for a review? Will there be a report put out for public 

comment at the conclusion? Does the OFR have a role in the process, I would ask? And will there be additional roundtables where 

all stakeholders can participate? 

Mr. PINSCHMIDT. Congressman, you are right. Following the July 

31st meeting, the readout for that meeting noted that the Council 

asked staff to undertake a detailed review of asset management activities and products. The Council has long recognized that asset 

managers are different than perhaps other nonbanks, and that was 

part of the reason in the 2012 final rule on the designations authority that the Council noted that additional work needed to be 

done, and that was the impetus for the OFR study, which identified 

certain activities. 

So to the extent that work is being done there, clearly when you 

look at asset managers and you compare them to other nonbanks, 

even the largest asset managers, their balance sheets are substantially smaller than other nonbank firms. There is very little leverage. 

There is an agency business model, which is quite distinct from 

a balance sheet business model. So to the extent that a company 

was in distress, they are not necessarily selling their own assets. 

The customers are kind of—it is their decision. 

Mr. ROYCE. Right. 

Mr. PINSCHMIDT. So these are different—oh, sorry. 

Mr. ROYCE. But the makeup of the working group and the 

timeline for review, if you could give me some information on that? 

Mr. PINSCHMIDT. In terms of the process going forward— 

Mr. ROYCE. Right. 

Mr. PINSCHMIDT. —that is a decision that is being worked out at 

the Council level and— 

Mr. ROYCE. That decision hasn’t been made yet? Will there be a 

conclusion put out for comment, do you think? 

Mr. PINSCHMIDT. To the extent the Council recognizes the importance of engaging with the public on its work, and that was part 

of the reason the Council hosted an asset management conference 

back in May. So we would expect, to the extent that this work 

moves forward, additional sort of consultation and collaboration— 

Mr. ROYCE. Maybe a public comment section—session at the end, 

then, would be appropriate, you are anticipating. 

Does the OFR have a role in the process? 

Mr. PINSCHMIDT. Certainly all the member agencies of the Council will be involved. 

Mr. ROYCE. Have the FSOC participants agreed that they will 

not meet with entities under consideration until an actual stage 

three designation is made, or—do you know? What is going on, on 

that front? 

34 

Mr. PINSCHMIDT. Congressman, in terms of the nonbanks designations process, what I would note is that we did put out the 

final rule that was subject to three rounds of comment. We recognize that was done 2 years ago now, and we have gone through a 

process with three different companies for designation. 

There are clearly new facts on the ground. The Council doesn’t 

want to be frozen in its ways and its process. So as I noted in my 

oral remarks, certainly the Council recognizes we have received a 

lot of input; we have gone through the process a few times and we 

are evaluating— 

Mr. ROYCE. Let me ask you this question: Is this policy formalized or documented? Are you putting out a documented process 

here that— 

Mr. PINSCHMIDT. Yes. In terms of the interpretive guidance that 

accompanies the final rule, it notes the interaction between the 

Council and this is also supplemented in the hearing procedures for 

the designations process—it notes the interaction between the 

Council and companies under consideration. 

Mr. ROYCE. We have talked about transparency and due process 

during this hearing, and I think a simple solution here would be 

publishing what the process actually is regarding interaction with 

companies in stage two, or purgatory, I think, as our colleague 

rightly termed it, and that might be your best way forward, if I 

might suggest. 

Thank you. 

Mr. DUFFY. The gentleman’s time has expired. 

The Chair now recognizes himself for 5 minutes. 

Mr. Pinschmidt, I listened to your opening statement and I was 

taken with your commitment and support for openness, transparency in policy, and a flow of information. I think those are some 

of the phrases that you used in your opening statement. 

As I have listened to the testimony today, I have great concern 

that FSOC isn’t open, it isn’t transparent, and there is not a good 

flow of information. And I think you have seen a bipartisan concern 

in regard to the information that flows, in regard to transcripts 

from the meetings, from FSOC. 

And I think all of us recognize that there are things that cannot 

be disclosed. There is confidential information that you have access 

to that the companies don’t want disclosed and wouldn’t want to 

share it with you if it was to be disclosed. 

But there is a lot of information and a substantial portion of a 

transcript that can be disclosed, and there can be redactions. And 

FSOC, per your testimony today, has no willingness to actually engage in a process of disclosing not minutes, but transcripts of a 

meeting, maybe even with a delay. 

So I guess as you sit here today, you are still committed to not 

using the various tools even that the FOMC will use, with a delay 

in time and redacting sensitive information, that FSOC is still not, 

seeing bipartisan concern here, going to at least go back and discuss the possibility of disclosing transcripts? 

Mr. PINSCHMIDT. Congressman, what I can say is that the Council recognizes it has a very important responsibility for transparency. It is a responsibility that has to be balanced, though, with 

the protection of confidential financial information. 

35 

Mr. DUFFY. Have you ever heard of redacting? Can you redact 

confidential information? That is a tool that you would have if you 

disclosed transcripts. 

Ms. Clowers, is that a tool that could be used—redacting sensitive information? 

Ms. CLOWERS. Yes. 

Mr. DUFFY. Do you believe that if we had a little delay in time, 

as would be appropriate, and redacted sensitive information, that 

transcripts could be disclosed? 

Ms. CLOWERS. Correct. That is one of the things we noted in our 

2012 report. We looked at different models, such as the open markets, and noted that those type of tools are available for FSOC. 

Mr. DUFFY. Does the FOMC discuss sensitive information like 

monetary policy? 

Ms. CLOWERS. Yes. 

Mr. DUFFY. And they still provide transcripts, yes? 

Ms. CLOWERS. Yes. 

Mr. DUFFY. And, Mr. Pinschmidt, you are discussing far more 

sensitive information? Is that your testimony here today that the 

FOMC can provide transcripts to the public but you can’t? 

Mr. PINSCHMIDT. Congressman, what I would say is that the 

Council is committed to getting more information out— 

Mr. DUFFY. Listen, you are not. I would say I love the dance that 

you have done today, but you are not. You have not given us—any 

of us—a satisfactory answer that, listen, we are going to go back 

and we are going to have a hard conversation on transcripts and 

redacting and making sure that we send out more than—I am looking at your annual reevaluation of designation of nonbank financial 

companies and you wanted us to believe that your minutes, or the 

summary, which is a paragraph, is sufficient for the public. 

That is what you wanted us to believe, and as I look at it, at the 

end it says, ‘‘Members of Council then asked questions and had a 

discussion.’’ Nothing about the questions. Nothing about the discussion. Nothing. And then, ‘‘The Council did not either—did not rescind either company’s designation.’’ 

What was the vote on this? What was the votes that were taken? 

How did everybody vote? 

Mr. PINSCHMIDT. Congressman, the— 

Mr. DUFFY. How did everybody vote? 

Mr. PINSCHMIDT. —the document you are referring to is the readout from the meeting. 

Mr. DUFFY. How did everybody vote? Do you disclose the votes? 

Do you know that I have a card right here, and every vote I 

make is public. Go to the Supreme Court. Every vote is public. 

How does everybody vote on FSOC? That isn’t even disclosed. 

And I look at the notice of proposed designation at MetLife. You 

had one present vote. Who was that? 

Mr. PINSCHMIDT. Congressman, I am not in a position— 

Mr. DUFFY. Who was it? 

Mr. PINSCHMIDT. —to identify. 

Mr. DUFFY. No, you are not. 

Again, you came and you said, you know what? We support openness, transparency, flow of information. 

36 

You know what? I bet it was the one person who had insurance 

experience. And I would love to hear the conversation that he had 

with FSOC in those meetings, the one guy with insurance experience who voted present and probably would dissent. 

Again, don’t come in and tell us you are open and transparent. 

We all want to see the process opened up; we want to see what is 

happening. 

Ms. Clowers, in her work—GAO has given you the same advice. 

So I guess I would look at the bipartisan effort and message that 

has been sent from this committee and go back and have a solid 

conversation and review the policies at FSOC. 

Mr. PINSCHMIDT. Congressman, we certainly look forward to 

working with the committee on that going forward. 

Mr. DUFFY. Thank you. I appreciate that. 

My time has expired. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And without objection, this hearing is adjourned. 

[Whereupon, at 12:25 p.m., the hearing was adjourned.] 

(37) 

A P P E N D I X 

September 17, 2014 

38 


91162.001
39 


91162.002
40 


91162.003
41 


91162.004
42 


91162.005
43 


91162.006
44 


91162.007
45 


91162.008
46 


91162.009
47 


91162.010
48 


91162.011
49 


91162.012
50 


91162.013
51 


91162.014
52 


91162.015
53 


91162.016
54 


91162.017
55 


91162.018
56 


91162.019
57 


91162.020
58 


91162.021
59 


91162.022
60 


91162.023
61 


91162.024
62 


91162.025
63 


91162.026
64 


91162.027
65 


91162.028
66 


91162.029